PERCEPTIONS AND THE POLITICS OF FINANCE - JUNK-BONDS AND THE REGULATORY SEIZURE OF FIRST-CAPITAL-LIFE

In May 1991, one month after seizing Executive Life, California regula tors seized First Capital Life (FCLIC). Both insurers were Drexel clie nts with large junk bond holdings, and both had experienced 'bank runs '. FCLIC's run followed regulators' televised comments that its poor c ondition necessitated a substantial cash infusion. Yet FCLIC's statuto ry capital - with junk bonds, real estate, and mortgages marked to mar ket - was far from lowest among major insurers with California policyh olders. It becomes lowest if junk bonds alone are marked to market at year-end 1990 (ignoring larger market declines in real estate/mortgage s and the junk bond market's 21% return in early 1991). Our findings s uggest a regulatory bias against junk bonds in the political backlash against the 1980s.